They say everything is bigger and better in Texas. I say, everything is bigger and “badder” (as in worse) on Wall Street today than 85 years ago.
Despite all the parallels that exist between today and the Great Depression, there is one factor that just doesn’t match up — time. The Great (post-2007) Recession has already lasted longer than the 1929 to 1932 market meltdown.
If you focus merely on elapsed time, you can reach two conclusions:
- Either there is no parallel, or the 2007 bear market is over
- The 2007 bear market will be more intense and last longer than the 1929 – 1932 parallel
A look at the pattern and shape of the post-1929 and post-2007 declines, along with the sentiment that accompanied major events within both periods, suggest that we are in a monster version of the Great Depression with the next leg down not too far away.
If You Think It Can’t Happen Again, Think Again
I’ve often heard that the Great Depression can’t happen again because we are no longer on the gold standard — the absence of the gold standard now allows the Federal Reserve to print their way out of any recession.
That is true, the Fed can now print unlimited amounts of money. However, the non-existent gold standard is a double-edged sword. Just as it enables the Fed to print money (which the Fed has done for decades), it has enabled a massive leveraged bubble. It’s this unbridled (by the gold standard) leveraged frenzy that created a huge financial leverage bubble, and the Federal Reserve attempted to fix the bubble’s consequences with a new bubble — the QE2 bubble.
Regarding the QE2 bubble, the May ETF Profit Strategy Newsletter stated that: “The Fed is fueling a new bubble to combat the damage left behind by the previous one. Once punctured, bubbles tend to deflate quickly.” Deflate it did. The S&P lost 296 points from the May 2 high to the Oct. 4 low. The “liberty” of an unbridled currency did not prevent the decline.
Here’s where the parallels between the Great Depression stock market meltdown and the post-2007 decline become interesting: